Analysis of REITs and InvITs Performance and Tax Framework in India

Over the last three years, Indian equities have faced challenges in decisively beating inflation. Benchmark Nifty 50 TRI compounded returns stand at 6.7 per cent versus the consumer price inflation (CPI) index at 4.1 per cent, while a standard SBI fixed deposit would have delivered 6.5 per cent. Extending the horizon to five years yields similar trends, with Nifty TRI compounded gains at 5.4 per cent, CPI at 4.95 per cent, and SBI fixed deposits at 5.4 per cent.

In contrast, investment in infrastructure trusts (InvITs) and real estate investment trusts (REITs) have delivered healthy double-digit risk-adjusted returns over the same periods. SEBI established the legal framework for these instruments in 2014, leading to the listing of the IRB InvIT Fund in May 2017 and Embassy Office Parks REIT in April 2019. Currently, the publicly-traded segment comprises seven entities with a combined market capitalization of ₹1.6 lakh crore, including Powergrid Infrastructure Investment Trust, IndiGrid Infrastructure Trust, Embassy REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust, Nexus Select Trust, and IRB InvIT.

At the core of REITs and InvITs is a trust that holds stakes in special purpose vehicles (SPVs) owning infrastructure assets like power transmission projects, toll highways, and IT parks. These structures are designed to provide stable, annuity-like cash flows called distributions. SEBI rules mandate that SPVs and trusts must distribute at least 90 per cent of their net distributable cash flows (NDCF) to unitholders. REITs and InvITs act as hybrid instruments, exhibiting characteristics of both debt and equity, offering returns through both cash distribution yields and price changes.

Performance data shows that all seven analyzed trusts have beaten inflation over three and five-year periods. Five-year CAGR returns range from high single-digits to mid-teens, while three-year returns range between 13 per cent and 22 per cent. InvITs typically offer higher distribution yields of 10 to 13 per cent compared to about 6 per cent for REITs, while REITs have historically delivered better capital appreciation.

Market performance analysis indicates that unit prices of REITs and InvITs are heavily influenced by interest rate cycles. Similar to bonds, these instruments trade at a yield spread over the risk-free rate. Unit prices generally rise during rate cut cycles and fall during rate hike cycles as yields adjust to maintain the required spread. Taxation for unitholders involves a pass-through status where distributions are taxed based on their underlying components, such as interest, rent, and repayment of capital, while capital gains follow rules similar to listed equity shares.

"REITs and InvITs have emerged as viable hybrid instruments for investors seeking stable cash flows and inflation-beating returns outside traditional equity and debt markets. While these assets offer robust distribution yields and regulatory transparency, investors must carefully analyze interest rate cycles and debt thresholds before making allocation decisions. Understanding the underlying asset quality and tax implications of capital repayments is essential for long-term wealth preservation in this segment." — Dr. Shishir Gupta, Founder & CEO, StartupLanes